A joint venture is a business agreement between two or more parties where the parties to the agreement share and pool their resources for the purpose of completing a specific task. Parties involved in a joint venture share expenses, revenues, assets and control of the project.
This article is designed to give you an overview of what is involved in setting up a joint venture.
What happens first?
Typically, during the initial stages of any joint venture, two parties will have a series of informal discussions about working on a business project together. After these informal discussions, the two parties will then seek to formalise the agreement in writing, normally with the assistance of a business lawyer. The obligations and rights of the two parties will then be documented in a Joint Venture Agreement.
Signing a Joint Venture Agreement is a major decision and you should take the time to consider a few essentials, including the following:
- Background checks/due diligence: You should spend some time doing what is called due diligence on the other party. Due diligence requires an in-depth investigation into the history of another business and can reveal whether or not the joint venture is a worthwhile investment depending on the financial viability of the other business. Talk to other businesses that have been involved with the business and chat to people who have worked with them. A failed joint venture will be damaging not just to your bottom line but also to the goodwill of your business.
- Define your roles: There should be no confusion as to the tasks each party will be taking command over. The more defined the roles, the less confusion there will be generally in the business relationship. Identify the most important objectives to both businesses individually and mutually.
One of the most important things to understand when you undertake a joint venture is that you owe each other a special set of legal obligations called fiduciary obligations or fiduciary duties.
Honesty and trust are key tenets of a fiduciary relationship, which means you cannot make secret unauthorised profits and conduct yourself in a way that may be viewed as prejudicial to, or conflicting with, the commercial relationship.
Your other key obligations when running a joint venture include taxation, record keeping, amongst other declarations. These, however, are not fiduciary obligations – simply legislative or regulative obligations.
Before you enter the joint venture, you should define your performance obligations in clear, unambiguous and objective terms. When it comes to sharing money from joint venture profits, it is not uncommon for disputes to arise. To deal with this your business lawyer should draft the agreement so that it states how performance will be measured and how it will be rewarded.
Is a joint venture the best option?
Keep in mind that there may be other business structures or commercial arrangements that are more suitable than a joint venture. In fact, this is not a format used very often in business arrangements. It is worth considering all other options for the most appropriate business structure, such as a company, a trust, a partnership or simply relying on a well-drafted shareholders agreement. Discuss these options with your business lawyer to get an understanding of what business structure is most appropriate for your particular circumstances.
If you want to set up a joint venture, it would be wise to speak to a business lawyer about the risks and process. Our business lawyers have experience in structuring and restructuring businesses of all shapes and sizes.